This article was originally published at miningWEALTH.com on September 29, 2016.
Overview: How Globex Operates and Why it Makes Sense
Three weeks ago we recommended shares of Globex Mining Enterprises (OTCQX:GLBXF) to subscribers. The company has an unusual, yet surprisingly appealing business model. Globex holds a large number of properties, which it options to exploration companies. These arrangements provide Globex with up-front cash/stock payments, and require that a minimum amount of exploration and development work is done on its properties. Should an exploration company complete the option requirements it gets control of the property, though it owes Globex a royalty on any production. Should the company fail to complete the requirements then Globex retains the property, any payments that were made, and access to the data acquired by the exploration company.
Critics will say that such a strategy gives away most of the upside. That's true: if Globex options what one day becomes a world class asset then it will merely own a royalty and some shares in the optioning company (assuming it doesn't sell them for working capital purposes). Such critics, however, often forget the cost of maintaining this upside, and the fact that for most projects this cost is steep relative to the value created.
Meanwhile, this "lost" upside comes with several perks.
- Globex's partners do most of the exploration work and pay Globex for the privilege of doing so. Exploration comes with a high probability of failure, so to mitigate risk it makes sense to develop ways to benefit from exploration without paying for it. Globex spends very little on exploration relative to the size of its property bank. A partner company may find a world-class deposit, but dilution and the cost of discovery can erode away profits. The fact that Globex retains royalties on the properties that it options means that it can retain exploration upside indefinitely, and we've written at length about the advantages of owning exposure to exploration success without being liable for the cost.
- Globex benefits whether its partner fails or succeeds in completing the option terms. Globex partners have added tremendous value to properties only to fail to raise enough capital to meet the full acquisition requirements. Ironically, despite the company's horrific share price performance from peak to trough (shares traded at a peak of C$7/share and at a trough of C$0.19/share), Globex benefited from the recent downturn and from the financial weakness of some of its partners. Even in a worst-case scenario, in which the partner finds nothing, Globex wins by gaining the knowledge that there is nothing to be found or that nothing has been found yet.
- Globex generates cash-flow, which is rare for a junior resource company. It generates cash-flow from up-front option payments, recurring option payments and pre-production royalty payments. It will shortly be generating cash-flow from a producing royalty, discussed below. If you glance at the company's recent PRs you'll find that the company receives payments quite regularly given the breadth of its portfolio. The payments are typically small, but they add up and should cover working capital expenses. As the resource market gets stronger Globex will be in a position to command higher option payments from its partners.
- Globex has exposure to a large number of properties, increasing the chance that it has exposure to at least one high quality asset.
In effect, Globex is trading much of the upside of a potential major discovery for downside protection and cost minimalization on its less attractive projects. It follows that Globex shares could easily underperform the shares of a highly successful partner, and if you think you are capable of picking world-class assets before the full extent of them is known the stock probably isn't for you. If you don't think you have this capability, or even if you do but recognize the high cost of exploration along with the high probability of failure, it makes sense to invest in a company that mitigates these risks.
Globex's Projects
Globex's model is attractive in itself, but the company's portfolio is equally as intriguing. One would think that a company with a C$14 million market capitalization and over 100 assets/properties would have second rate assets. While this may be true of some there are several properties and royalties that in themselves justify owning the shares.
The portfolio is too expansive to provide details on all of the major properties but a couple of themes and individual examples are worth mentioning.
Themes
First, the company is highly concentrated in the Abitibi Greenstone Belt in Quebec, extending into Ontario. The area is highly prospective and has attracted a lot of capital and some of the most widely regarded resource participants in the world including Sean Roosen's Osisko Gold Royalties (OR) and Osisko Mining (OSKFF) and Keith Neumeyer's First Mining Finance (OTCQX:FFMGF). Globex owns several properties in the region, some of which border on properties held in strong hands or which are highly valued by the market.
Second, the company only acquires properties that have resources (NI 43-101 compliant or otherwise), past production, or some other strong indication that there can be future production. Several of the company's projects have sizable resources already delineated.
Third, the company is resource agnostic. True, it has a lot of exposure to gold in the Abitibi Greenstone Belt (in terms of the number of properties the number of gold properties probably exceeds the number of non-gold properties), but it also has exposure to zinc, copper, silver, PGMs, nickel, feldspar, talc, REEs and lithium. Thus it will almost always have exposure to something that is in favor (e.g. lithium, gold and zinc right now).
Select Projects
Right now the most intriguing individual property is probably the company's royalty on Nyrstar's Mid Tennessee Mine. The mine was shut down last year due to low zinc prices, but before that it produced ~20,000 tonnes of zinc in its last 6 months of production. The 1% royalty (which rises to 1.4% at zinc > $1.10/lb.) generates about $1 million per year and has resources to support production for decades. With zinc trading over $1/lb. again Nyrstar has just decided to bring the mine back into production. Considering the high multiples that investors have been ascribing to royalty and streaming companies the company's current ~C$15 million (US$12 million) can be almost fully justified by this asset alone. Note that the stock has not moved on the restart news, and we believe this is a market inefficiency worth exploiting.
The Timmins Talc and Magnesite Project is the most advanced holding in Globex's portfolio. It is a talc/magnesite deposit near Timmins, ON with a PEA showing an IRR of ~20% and an NPV (10%) near $200 million after taxes. Were this project in the hands of a well marketed junior resource company whose sole agenda was to bring it into production we suspect this hypothetical company's valuation could easily exceed Globex's current valuation.
Duquesne is 50% owned by Globex with the remaining 50% held by the company's CEO Jack Stoch. The project is an example of how the company can benefit from a partner's shortcomings. Duquesne has been optioned 6 times, and as a result Globex/Stoch have not had to pay for the delineation of ~853,000 oz. of gold (426,000 attributable to Globex). With quality in-ground ounces in the region selling for > $50/oz., Globex's share in Duquesne can alone justify the company's current valuation.
Again, there are far too many properties in the company's portfolio for us to cover fully. A complete list with links to descriptions and other data can be found here.
Some Other Points
At Globex data is king. The company has compiled a seemingly endless supply of data, and it formulates its option agreements in a way that ensures it has access to all of its partners' data, even if the company has completed the earn-in (remember Globex retains a royalty and is partially compensated in company stock, so this is important). Recall that one of the drawbacks of Terraco Gold (TCEGF) is that it does not have access to Waterton's Spring Valley data, so that our knowledge of Terraco's royalty's value is limited to the data provided by Barrick/Midway through last year.
Globex structures its royalties differently from most companies. Most royalties are net smelter return (aka "NSR") royalties that stipulate that the royalty holder gets a certain percentage of revenue generated after the metal has been smelted. Smelter costs can vary, and accounting trickery can result in a mining company "cheating" its royalty partner out of its fair share (Royal Gold (RGLD) shareholders know what this is like!). Globex owns "gross metal royalties" or "gross overriding royalties" which means Globex can receive either a percentage of the metal produced by the refinery (or processing plant in the case of industrial minerals) or a percentage of the proceeds from the metal sales by the refinery. We note that many royalty companies have caught on and have begun structuring their royalties as streams (streaming companies buy the metal at a pre-determined price for sale on the open market rather than receive royalty payments) with the payment price determined as a percentage of the underlying commodity price. Mathematically it is the same thing (e.g. a 5% stream on which the streamer pays 50% of the metal price is equivalent to a 2.5% royalty). Globex was ahead of the curve on this.
The company is run by Jack Stoch who has been building the Globex portfolio for 30 years. He is extremely knowledgeable of the projects in the portfolio and of surrounding projects, especially in the Abitibi Greenstone Belt. He and his wife own ~10% of the company.
The Bottom Line
Globex offers investors a rare opportunity to invest in a company with a compelling business model and a rich asset base whose value has not been recognized by the market. We've seen how the company has developed a way to maximize the probability that it benefits from its properties and transactions regardless of the success/failure of its partners. Meanwhile, Globex's portfolio contains several valuable assets that the market currently overlooks. We suspect that this is a function of the company's unusual business model in a world where junior mining companies focus on one or a small handful of "highly prospective" assets. The lack of focus makes things difficult for analysts, and even we have decided not to ascribe a price target to Globex shares. However, just based on the assets listed above one could make the case for a valuation substantially higher than Globex's current market capitalization.